VIEWS FROM THE CAPITALS
VILNIUS - Lithuania’s “austerity crusade” threatened by deepening recession
Summer 2009
Lithuania is responding to a dramatic reversal in its economic fortunes with a relentless austerity campaign. The conservative-led government has cut public spending repeatedly since taking office last year. It has hiked taxes and reduced wages. The problem for Prime Minister Andrius Kubilius is that his economic policy pretty much begins and ends with these budget cuts. Economic reforms and promised initiatives are increasingly judged by one criterion alone – whether they reduce public expenditure or not. But the recession is biting harder than expected and revenue targets are not being met. People are wondering if Lithuania might have to follow Latvia’s lead and ask the International Monetary Fund or the European Union for help.
The recession in Lithuania is particularly severe. Growth had been robust until the global slowdown choked both credit and export markets. The country topped the EU table of the worst economic performers in the first quarter, when the year-on-year fall in output was measured at more than 12%. The official forecast for a 10% contraction this year is looking more and more optimistic. However, the government has so far refused to borrow from the IMF and to use the EU’s balance of payments facility. With the downward spiral apparently unavoidable, the arguments against such action are becoming difficult to understand.
Politics is one possible explanation for the government’s determination to stick to its austerity drive. There is a consensus in the country that certain budget cuts are necessary, and Prime Minister Kubilius has a track record for financial prudence after he steered Lithuania through the last economic downturn in 1999. The previous social democrat-dominated government lost power after it consistently ignored warnings about the approaching crisis and failed to shore up the nation’s reserves. Thus the latest four-party coalition feared any increased borrowing would damage their standing during the presidential and European Parliamentary election campaigns this spring. In addition, the front runner for president, EU Budget Commissioner, Dalia Grybauskaite has described recourse to the IMF as a sign of impotence. She has argued that the only economic policy choice for Lithuania is between more budget cuts and devaluation of the currency.
Like other Baltic currencies, the Lithuanian litas is pegged to the euro. But there seems little chance that Lithuania will be able to join the eurozone in the near future. The European Central Bank and eurozone member states quickly quashed an IMF suggestion that beleaguered EU countries might be let into the monetary union to help stabilise their economies. At best, therefore, membership of the eurozone is only a medium-term option for Vilnius.
There is, though, one EU financial door open to Lithuania that is giving the government some leeway for stimulating the economy. Vilnius is re-channelling EU structural funds to help small businesses and the construction sector. Under this, the European Investment Fund will manage a new fund to provide guarantees and micro-credits to small and medium-sized enterprises. A separate energy fund, managed by the European Investment Bank, will help to finance energy efficiency projects in Soviet-era apartment blocs. This will help to reduce the country’s energy consumption and, indirectly, its dependence on Russian gas. This fund will also inject liquidity into the banking system as the renovation micro-loans will be distributed via the banks.
The government is keeping a careful eye on Lithuania’s banking system. So far it has ridden out the worst of the global financial turmoil, with the government only having to raise and extend deposit guarantees. The country’s two biggest banks have benefited from the backing of their Swedish parent banks. However, a deepening recession will certainly expose more problems in the financial sector. And if the situation gets noticably worse, it might be enough to overcome the government’s reluctance to ask the EU for direct economic assistance. If so, it will be interesting to see if this makes the Union more popular among Lithuanians. It could even improve the current government’s own popularity rating.